Oil’s Seismic Shock

From Goldman Sachs Research, this is Alison Nathan. Welcome to Top of Mind, a podcast that explores macroeconomic issues on the minds of our clients. In this episode, we're focusing on developments in the global oil market over the past month, which has been hit hard by simultaneous shocks amid the continuing coronavirus outbreak. First, there's the almost unimaginable demand shock owing to the outbreak with demand for transportation fuels plunging as the world economy heads into recession. The other shock involves OPEC and the collapse of the historic 2016 agreement between those member natio

Is this the biggest oil shock you've ever witnessed?

This is the biggest oil shock because it's global, and it comes at a time when the global economy is largely shutting down. I think the one that's most analogous to it in some ways is 1998 when oil production was going up just into the Asian financial crisis and demand was going down. And, basically, the global industry ran out of places to store oil, and oil went to $10 a barrel. Right now, we're seeing the biggest drop in oil demand in modern times.

I then spoke with Gary Ross, founder of PURA Energy Group. I started by asking him to give us some background on the relationship between OPEC and Russia and how we ended up with the recent collapse of OPEC plus.

Saudi Arabia, OPEC has been trying to manage the market for a long time, and it became more and more difficult as non OPEC production has continued to grow. If you just think about in OPEC, who really cuts its Saudi Arabia, Kuwait and The UAE are sort of the three core members of OPEC who cut. And if the Saudis are doing 10,000,000 barrels a day and The UAE is doing three and Kuwait is doing 2.5 that's like 15,500,000 barrels a day, while world crude run, call it, is something like 85,000,000 barrels a day and total global demand is something like 102,000,000 barrels a day. She can see how ext

When it comes to the collapse of OPEC plus, both Ross and Juergen agreed that it was certainly brewing even if it was unexpected. Here's more with Juergen.

Were you surprised by the failure of OPEC plus of Saudi Arabia and Russia to reach an agreement on further production cuts?

It was already clear that the OPEC plus agreement, which was really an agreement between Saudi Arabia and Russia, was already fraying because of different perspectives, different needs of the two countries. I think the Russian position is we shouldn't do anything now. Let's continue this to June and see where we are. And it was notable that the Russians had already canceled the St. Petersburg International Economic Forum, which was scheduled for June, which is their really big economic event. Because I think they thought this thing was going to get a lot worse. I think the Saudis were much mor

How much do you think U. S. Sanctions on Rosnest and the Nord Stream two pipeline played a role here?